Supreme Court Compounds Uncertainty For Business Method Patents

BY CCIA Staff

June 28, 2010

The Supreme Court has issued a long awaited decision that could impact whether business methods can be patented. The Supreme Court denied a patent for a risk management method in Bilski v. Kappos, while still allowing some business methods to be patented. The justices reduced the strength of the lower court rejection by stating that the “machine or transformation test” should not be the sole test for whether an invention is patentable.

Those concerned about evidence the current system is harming innovation by forcing companies to devote more resources to lawyers than engineers had hoped the Supreme Court would help rein in the problem. The past decade has seen an explosion of patenting since the State Street ruling, which removed limits to patenting. The State Street court decision had led to a dramatic rise in patent lawsuits, lower quality patents and a backlog for legitimate patents waiting to get through the U.S. patent process.

The Computer & Communications Industry Association, which had filed an amicus brief in this case, is disappointed the Supreme Court did not use this opportunity to bring more clarity to help correct the broken patent system. The following comments can be attributed to CCIA President & CEO Ed Black:

“This narrow ruling does little to curb the explosion of patents and patent lawsuits that are crushing real innovators.

“The majority’s decision exacerbates the uncertainty that characterizes the IP system today. It will give no notice to the public about when ordinary business practices can lead to ruinous liability. Businesses will be forced to navigate an increasing abstract patent minefield, raising business uncertainty and legal costs.

“Businesses today are continuously developing new methods of competing in the global marketplace. Adding a patent incentive is superfluous, and will only limit competition.

“Expanding the scope of the IP system, in the absence of any evidence-based reasons to do so, will only hurt, not help innovation.

“Ultimately, today’s decision benefits few except patent lawyers. Absent action by Congress, the patent lottery will inhibit business and create no jobs — except for within the patent bar.”

The following quotes can be attributed to CCIA Senior Fellow Brian Kahin, a principal author of CCIA’s amicus briefs in the Bilski case:

“By concluding that the hedging technique was no more than an abstract idea, the Court breathes new life into the abstract idea exclusion, but does not offer new guidance on just what that is. The opinion is fairly clear about what it isn’t doing. It is not clear about what it is doing.

“By declining to give fixed meaning to terms like ‘process’ and ‘business method,’ the Court has recreated at a systemic level the problem of fuzzy and uncertain boundaries that have plagued patents in abstract areas and made it both risky and costly to assert, avoid, or defend against patents.

Additional history/background information:

The Computer & Communications Industry Association had filed an amicus brief asking that the Supreme Court uphold the decision of the Court of Appeals for the Federal Circuit in the Bilski case, which denied a patent for a method of hedging on utility contracts.

Prior to the Federal Circuit’s State Street decision in 1998, it had always been understood that patents were for technology — not for all organized human activity. This principle was judicially recognized as the “business method exclusion.” State Street abolished the exclusion, and since then there have been no discernible limits to the patent system, leading to patents on such things as exercising cats, toilet reservation systems, making a peanut butter and jelly sandwich, dating methods and even tax avoidance strategies.

CCIA fellow Brian Kahin has called the State Street case “an embarrassment to the American judicial system.” The author of the opinion, a former patent lawyer, concluded that the patent system should not be limited to technology, but should apply to all human activity. Kahin likened it to giving patent attorneys a ball and saying, “here, fellas, take the ball and run as far and fast as you can.

As CCIA’s Supreme Court brief pointed out, “the explosive spread of the patent system in the wake of State Street has undermined the reliability of the patent system.”

The CCIA brief for the Bilski case argued that boundaries of patentable subject matter must be drawn very conservatively. Patents are very powerful since they control any use of the patented subject matter without regard to whether infringement is innocent or not. But in IT, especially software, clearing thousands of functions against possible patents is prohibitively costly.

In Bilski, the Federal Circuit corrected its course, not by overruling State Street but by resurrecting a longstanding Supreme Court test that limited process patents to physical transformations when no particular machine is involved.

Congress has been working on patent reform for years, but has been stymied by differences in business perspective, many of which reflect industry differences. Economic research now shows that the patent system is actually having a negative effect on much of the economy. The pharmaceutical and biotech industries are relatively happy with the system as it is, however, and have blocked major changes.

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